Collaborating with consociates who share my values and passion.

A failure of management.

In this guest post from Dr Jules Goddard he explains why studying failing organisations is more productive than studying those that succeed.

Business failure is much more interesting than business success. Failure tends to conform to a rather small number of pathological patterns, whereas success is invariably a one-off.

There is very little of interest that can be said about success because, by definition, it doesn’t generalize. If it did, every aspiring entrepreneur could be successful simply by adhering to a limited set of established principles. However, we know from practice that this is an illusion.

No sooner have Tom Peters, Jim Collins and other business observers claimed to have unlocked the secret of excellence, getting from good to great (or some other winning formula) than their chosen exemplars regress to the performance mean of their industry and the hunt for the snark has to start all over again.

Failure would seem to be different. It is less idiosyncratic. When things go wrong, standard reasons are usually to blame.

Incompetence is patterned. Unlike success, failure lends itself to generalisation and can therefore become the basis for theory building. We can imagine a science of business failure in a way that would not make sense for a science of success.

Warren Buffett has always been intrigued by failure:

I’ve often felt that there might be more to be gained by studying business failures than business successes. In my business, we try to study where people go astray and why things don’t work. If my job were to pick a group of 10 stocks in the Dow-Jones average that would outperform the average itself, I would probably not start by picking the 10 best. Instead, I would try to pick the 10 or 15 worst performers and take them out of the sample and work with the residuals. It’s an inversion process. Start out with failure and then engineer its removal.

Systemic reasons

Organisations typically fail for one of two systemic reasons: mismanagement or over-management. Mismanagement is a particular kind of market failure in which the organisation operates to a mistaken understanding of the market it serves. For example, Eos and Maxjet both assumed, falsely, that the market for trans-Atlantic air travel could support an exclusively business-class airline. By contrast, over-management is a form of institutional failure in which the organisation takes on too large an administrative burden. The current woes of the National Health Service, for example, result essentially from an inflated view of the efficacy of bureaucracy. There are simply far too many managers.

The latter source of failure is insufficiently recognized – both by theorists of management (who tend to take a Pollyanna-like view of the potential of managerialism) and by practitioners themselves (who have a vested interest in its efficacy). Organisations get bigger, more complex and ever more global – until the task of coordinating the workload and motivating those doing the work becomes simply too great for mere mortals. It is a bad organisation that requires extraordinary managerial skills for it to flourish. For example, the quality of the head teacher is now the most important factor discriminating good from poor schools in Britain. Something is drastically wrong when organisations become so dependent upon the qualities of a single individual. In business, this disease has been called ‘the cult of the CEO’.

The signs of over-management are now widespread and self-evident: layer upon layer of managers reporting to other managers on managerial issues; an internally focused culture of long and indecisive meetings, incessant emailing and endemic micro-management; a long-hours culture; large numbers of disengaged and demoralised employees; a neurotic obsession with displacement activities such as restructuring, operational excellence or change management; and a language of impenetrable jargon.

The root cause of over-management is an exaggerated faith in managerialism. We give executives the job of both coordinating a wide range of tasks and motivating those who are performing these tasks. But above a certain size or complexity of organisation, this job becomes undoable. Our response to this dilemma is to make matters worse by employing even more managers or even more expensive managers to manage what has become unmanageable. In many organisations, managerialism is now the problem and not the solution. In the context of economic planning in socialist economies, Friedrich Hayek gave the name ‘the fatal conceit’ to the belief that a small number of very clever economists could allocate resources more productively than markets. In many companies, the same fatal illusion has taken hold.

Above a certain size (my view: 150 employees), coordination is better achieved by market principles of self-organisation and emergent order than by hierarchical principles of control and constraint. Motivation is more likely to result from a culture that emphasises autonomy of the individual, the development of personal mastery and an ambiance of sociability rather than targets, key performance indicators, scorecards and financial incentives.

The recent onslaught by behavioural economists such as Daniel Pink’s Drive: The Surprising Truth About What Motivates Us (Canongate, 2011), Richard Thaler’s and Cass Sunstein’s Nudge: Improving Decisions About Health, Wealth, and Happiness (Penguin, 2009) and David Brooks’ The Social Animal (Short Books, 2011) on the traditional notion of rational economic man adds fuel to this critique of manageralism, by refuting the assumption that man is essentially a calculative being who sees and treats others primarily as resources or ‘factors of production’.Organisations that need large numbers of highly skilled managers to run them are simply organisations that are not serving a self-evident purpose, that are staffed with the wrong people, or that are structured into jobs that require a high level of supervision. Peter Lynch, one of Fidelity’s most illustrious funds managers, used to look to invest in ‘simple businesses that anyone could run’. Where highly talented (and expensive) executives are necessary, a fundamental error has been made in the design of the organisation.

Generally speaking, most people in managerial positions are only needed because:

• People on their own can’t do their job without help and support (a problem of incompetence).

• People without close supervision would cheat on their employer (a problem of mistrust).

• The work to be done is poorly specified, the decision rights are unclear or the customer is remote (a problem of incoherence).

In each case, the solution lies elsewhere than in more management.

Better leaders?

The same doubts and reservations about managerialism also hold for the concept of leadership, the more genteel word for management. ‘Stronger leadership’ or ‘better leaders’ is the fashionable battle cry; but it should come as no surprise that most employees (those who are regarded as needing to be led), when asked to nominate some great leaders, come up with the names of Alexander the Great, Genghis Khan, Napoleon, Hitler and Stalin. Who said cynicism was dead?

The deeper question is why a business would ever want to employ someone who needed to be managed or led. Why would a self-respecting individual ever want to apply for a job that entailed being led by someone who was seeking followers?

Richard Rumelt recently suggested that, when times get tough, it’s time to dispense with all those people who need to be managed. But why did we have to wait for the recession?

And why did we design organisations in the first place to be so dependent on bosses?

Jules Goddard (jgoddard@dial.pipex.com), formerly Gresham Professor of Commerce at City University and currently a Fellow, Centre for Management Development at London Business School.